COMPASS MINERALS INTERNATIONAL INC annual report, FY2013

Compass Minerals International, Inc. — FY2013 Form 10-K Summary

Business context and reporting period

The filing covers the fiscal year ended December 31, 2013, with comparative information for 2012 and 2011. Compass Minerals produces and markets salt, magnesium chloride and sulfate of potash specialty fertilizer in North America and the U.K. Its two reportable segments are Salt and Specialty Fertilizer. Highway deicing represented approximately 51% of 2013 gross sales, making results highly seasonal and sensitive to winter weather.

Financial performance and key metrics

Metric	2013	2012	Change
Sales	$1,129.6 million	$941.9 million	+20%
Gross profit	$286.0 million	$227.1 million	+26%
Gross margin	25.3%	24.1%	+1.2 percentage points
Operating earnings	$185.6 million	$133.2 million	+39%
Net earnings	$130.8 million	$88.9 million	+47%
Diluted EPS	$3.88	$2.65	+46%
Adjusted EBITDA	$258.6 million	$197.7 million	+31%
Cash flow from operations	$238.3 million	$151.7 million	+57%

• Salt sales were $920.5 million, up from $703.4 million. Salt shipments increased 38% to 13.265 million tons, primarily because of near-average first-quarter and more severe fourth-quarter winter weather versus the unusually mild 2012 winter.
• Salt product sales increased 30% to $639.8 million. The combined average salt selling price declined to $69.39 per ton from $73.08 because of a higher mix of lower-priced deicing products.
• Specialty fertilizer sales declined 12% to $198.6 million, while SOP shipments fell 14% to 315,000 tons. The average SOP price increased to $630 per ton from $616 as the company emphasized higher-value domestic markets.
• Operating margin was approximately 16.4%, compared with 14.1% in 2012. The effective tax rate increased to 25% from 20%, and interest expense was $17.9 million versus $18.2 million.
• Capital expenditures were $122.7 million, including approximately $15 million for replacement and improvement of assets damaged by the Goderich tornado.
• Cash and cash equivalents were $159.6 million at year-end, compared with $100.1 million in 2012. Total assets were $1.405 billion and stockholders’ equity was $554.2 million.

Debt, liquidity and cash deployment

• Total debt was $478.6 million at December 31, 2013, consisting principally of a $380.2 million variable-rate term loan due May 2017 and $98.4 million of 8% Senior Notes due June 2019.
• The company had no borrowings under its $125 million revolving credit facility. After $7.8 million of letters of credit, available borrowing capacity was $117.2 million.
• Management stated that operating cash flow, available cash, revolving-credit availability and expected insurance recoveries should be adequate for liquidity needs over the following 12 months.
• The reported total leverage ratio was 1.8x, and the company was in compliance with its debt covenants at year-end. A 100-basis-point increase in variable borrowing rates would have increased annual interest expense by approximately $3.8 million based on year-end debt.
• Financing activities used $66.4 million of cash, including $73.1 million of dividend payments and $3.9 million of debt repayments. The company paid $2.18 per share in dividends during 2013 and declared a $0.60 per share quarterly dividend in February 2014.

Material changes versus the prior comparable period

• Results rebounded sharply from 2012, when mild winter weather, lower salt production, elevated inventory costs and the continuing effects of the 2011 Goderich tornado depressed sales and earnings.
• Salt segment operating earnings increased to $181.3 million from $126.0 million, primarily reflecting higher deicing volumes and improved production costs. Specialty fertilizer operating earnings were broadly unchanged at $58.7 million despite lower volumes.
• The company resumed purchasing and consuming potassium chloride feedstock at the Ogden SOP facility in 2013. This supported production and demand fulfillment but increased per-unit costs.
• Ogden operational issues and lower-than-anticipated utilization of expansion capacity constrained SOP production. Effective solar-pond-based SOP capacity was expected to reach up to 320,000 tons annually beginning in 2014.
• Operating cash flow increased by $86.6 million, aided by higher earnings and a $20.4 million reduction in working capital items versus a $36.8 million working-capital use in 2012.
• Foreign-exchange translation reduced accumulated other comprehensive income by $24.4 million in 2013, and the stronger U.S. dollar negatively affected reported foreign sales and operating earnings.

Outlook, unusual items and principal risks

• Management expects continued long-term demand for salt and potassium nutrients, but near-term performance remains dependent on winter weather, agricultural economics, SOP and competing potash prices, crop conditions and solar evaporation conditions.
• The company recognized a $9.0 million fourth-quarter gain from settlement of an insurance claim related to mineral-concentrated brine lost after a 2010 solar-pond asset failure. It also recorded a $4.7 million charge related to a labor ruling.
• The Goderich tornado’s operating impact was immaterial in 2013. The company had received $86.3 million of insurance advances since the tornado and carried $56.5 million of related deferred revenue at year-end. Final settlement was expected in 2014, but the amount and timing of additional recoveries remained uncertain.
• The company is seeking permits and leases to expand its Great Salt Lake solar-evaporation acreage. Capital expenditures associated with the project totaled $7.0 million at year-end; failure to obtain permits could require an impairment evaluation.
• Canadian tax authorities have issued disputed reassessments of approximately $75 million and $102 million, including interest and penalties, relating to separate matters. The company had posted or agreed to post performance bonds and other collateral, and stated that the ultimate outcomes could be material if unresolved favorably.
• Other risks include mine and plant accidents, flooding, environmental liabilities, permit renewals, transportation availability and costs, energy and KCl prices, labor negotiations, foreign-exchange movements, interest rates, cybersecurity, customer and counterparty credit, and competition.
• The company had approximately $697.6 million of contractual cash obligations, including $480.2 million of scheduled debt principal, as well as $90.1 million of letters of credit and performance bonds.

Important facts for investors to verify

• Verify the sustainability of 2013’s salt volume and earnings improvement, particularly the effect of weather normalization and inventory costs.
• Review SOP production reliability, the economics of KCl feedstock purchases and progress toward the stated 320,000-ton Ogden capacity.
• Track settlement and accounting treatment of the Goderich tornado insurance claims and the remaining deferred revenue.
• Monitor Great Salt Lake permitting, capital requirements and potential impairment exposure.
• Assess the outcome, collateral requirements and cash-flow impact of the disputed Canadian tax reassessments.
• Evaluate debt refinancing and covenant risk ahead of the May 2017 term-loan maturity and the June 2019 senior-note maturity.
• Consider dividend capacity in light of debt restrictions, seasonal working-capital needs and planned capital expenditures.